Whether sustainable investors can have a positive impact on business and society has been the center of debate in recent years. One major obstacle holding sustainable investing back from maximizing its impact is that most investors operate with too narrow of an understanding of how impact can come about. Most investors believe they have two primary ways to influence companies. First, there’s portfolio screening, often termed “exit.” In this approach, investors shift capital from non-sustainable to sustainable companies. The second strategy is shareholder engagement, frequently called “voice.” Here, investors directly urge companies to adopt more sustainable practices through means like meetings, shareholder proposals, or voting.
A More Impactful Strategy for Sustainable Investing
The effectiveness of sustainable investing has been challenged, with critics like Tariq Fancy describing it as a mere placebo. Amidst rising skepticism and stricter disclosure requirements, a deeper dive reveals that traditional methods of influencing companies, namely “voice” (shareholder engagement) and “exit” (portfolio screening), are not exhaustive. Through a comprehensive review of over 3,500 research papers, a new approach — “field building” — emerges. This tactic acknowledges the interconnected web of stakeholders around companies, termed “fields”, that profoundly influence corporate behavior. By reshaping these fields, investors can indirectly drive sustainable change in firms. Five tactics are highlighted: (1) Shifting other investors’ evaluation of issues, (2) Sharing expertise, (3) Delegitimizing certain business activities, (4) Establishing voluntary standards, and (5) Supporting regulatory changes. While promising, field-building presents challenges like profitability and political exposure. Yet, by embracing this expanded toolkit, investors can magnify their positive impact and appeal to an increasingly conscious investment clientele.